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How to Avoid Losing Your Fortune to A Lame Lawsuit

Just about everyone is a potential target for a lawsuit these days. Here are some facts about the legal climate today. Over 19 million lawsuits are filed in the U.S. each year. We have 5% of the world’s population and 80% of the world’s lawyers. Ninety percent of all lawsuits in the world happen right here in the U.S. And it’s getting worse. According to the American Bar Association, there are close to 700,000 lawyers in practice at present. That’s one lawyer for every 400 men, women and children! So if you own a business, own investment properties or practice a profession you have a one in three chance of being named in a lawsuit THIS YEAR!

It used to be that people didn’t worry about frivolous lawsuits when they weren’t at fault. That’s not the case any more. Remember the woman who was awarded over $2 million in a suit against McDonalds’ because she spilled hot coffee on herself? It’s these kinds of awards that prompt people to file spurious or questionable lawsuits. The challenge is that most lawyers handle these cases are on a contingency fee basis which means clients don’t pay a dime unless they win or settle the lawsuit. When there are no upfront costs to file a lawsuit, there’s nothing preventing them from making a frivolous claim. So with that being the mindset of the general public it’s obvious why you need to protect yourself.

WHAT IS ASSET PROTECTION AND HOW IT WORKS

Now if you have read anything on asset protection there are two basic questions you should be asking yourself:

Does it work?

Is it legal?

So now let’s talk about what asset protection is. How it works? And answer these two questions.

Essentially asset protection is a legal way to put your assets beyond the reach of those who would like to take them from you by filing a lawsuit. Here is an example you are likely familiar with that demonstrates its effectiveness and legality.

Remember the O.J. Simpson case? O.J. went to trial in 1995 and was acquitted of murder charges. His story is a perfect example of how and why asset protection works. Now there’s a whole criminal side to O.J.’s case. So let’s put aside the moral issues surrounding O.J. We’re just talking about asset protection here. The point here is that the nation was able to see for the first time how an alleged murderer was able to have a judgment entered against him and no one was able to collect any money. So let’s outline what happened here. By the way, do you know how O.J.’s doing now? Do you have any doubts he’s living all right?

He moved to Florida because the golf was better, the private schools were nicer and frankly the people in Los Angeles didn’t want to talk to him anymore. But no one’s collecting any money from O.J. As we go through this, you’ll see how O.J.’s team of experts used many different asset protection strategies effectively.

What happened after he was acquitted from the criminal charges? The Goldmans sued him on a wrongful death case in civil court and obtained a judgment for $33.5 million. Yet have they collected anything? All they got was his Heisman trophy and his Rolex. The piano he said belonged to his mother. But what happened to his money? Well he was lucky. O.J. had pensions or retirement plans through the NFL and the Screen Actor’s Guild (SAG), and both pensions were exempt from judgments by law in California.

So what did he have in his pension accounts? He had about $4.2 million, which throws off about $25,000 a month. That’s how he pays his greens fees for golf and how he sent his kids to private schools.

What about his house? He had a nice home near Beverly Hills. What happened there? The house was worth $3.5 million. He had a first mortgage for $1.5 million. The question everyone asked was what happened to the rest of the equity? Why didn’t they take it?

Well, he had what are called equity stripping mortgage liens placed on it. By the time they got to the house all the equity was encumbered in favor of his attorneys. His home was leveraged to the hilt so by the time the Goldmans got to it there was nothing left for them to take. There was also the homestead exemption, which in California is up to $75,000. It varies from state to state.

Now that he’s living in Florida he has a boat, an office, a car. People wonder how he has all these things.

He leases these things. You see, by law no one can seize a leasehold interest.

So back to the two questions we started this example: does asset protection work and is it legal? Well, how’s O.J. doing so far? He’s doing just fine. What about its legality? Remember this was the most publicized trial in U.S. history. It was under total scrutiny from the media, the public and legal professionals everywhere. People were itching to put this guy behind bars or at least force him to pay in dollars for what he allegedly did. They couldn’t because his assets were protected within the lines of the law.

Another question critics of the O.J. case bring up is this, if most of the money he has is protected from judgments and bankruptcy, why doesn’t he just go bankrupt and release this $33.5 million judgment against him? One reason is you must submit a list of all your assets when you file bankruptcy. If you leave something of substance off that list, you can be indicted for bankruptcy fraud. There is only one logical explanation why O.J. doesn’t file bankruptcy; it is because he likely has money offshore. This is the part you probably won’t find in any books or news articles. O.J.’s mother lode is purported to be in the Isle of Guernsey, probably $5-10 million. Now he’s not going to go bankrupt and leave this off the list and then have some angry girlfriend tell on him and get him indicted and sent to prison.

THE NUTS AND BOLTS FOR EFFECTIVE ASSET PROTECTION

Now to be truly effective, all asset protection strategies must meet three criteria.

Liability Protection. You must be legally protected from any liability.

Control of the assets without owning them. You see, if assets are not owned personally by you then they can’t be taken when someone comes after you. So to achieve this protection you have to set up your asset protection plan in a jurisdiction that supports a high degree of asset protection.

The third and most important criterion for effective asset protection is that it must be done at the right time. You must act ahead of time to protect what you own BEFORE it comes under attack. Once a lawsuit is expected or has been filed, the law will not allow you to move your assets.

So as we talk about different types of asset protection we will come back to these important criteria.

HOW TO ACHIEVE ASSET PROTECTION

What is the best way to achieve asset protection? It can be summed up in three words: Don’t Own Anything.

Now you might think that this flies in the face of the American Dream which says you need to own your own car, home and everything else that is a prerequisite for a happy and successful life. Now we are not talking about not eliminating debt on those assets. It’s great to be debt free. You just don’t want to own those things in your own name because if you technically don’t own the assets, but merely control them, then the assets are well protected, and you still have the use of them. You see, you don’t want ownership. Ownership is a liability. What you want is use of the assets. In fact it was John D. Rockefeller who summed up this philosophy when he said “Own nothing and control everything.” So to really start to understand the mindset around asset protection you need to think like a Rockefeller.

One way to achieve this protection is through the formation of limited liability companies (LLCs) and limited partnerships (LPs or FLPs) to hold the assets. Why LLCs? Under the law, a LLC is an artificial “person” completely separate from the people who own it and control it. This is different from an individual or sole proprietorship. With an individual or sole proprietorship the owner bears full and complete responsibility for his actions. But a LLC is an independent entity. A LLC’s liabilities are separate from those of its owners. Therefore a LLC gives you the greatest personal liability protection and this meets our first criteria we talked about.

Another reason LLCs are advantageous is because they enable you to compartmentalize your businesses or assets. You can place different assets under separate LLCs. Now you still have complete control over everything, but if one asset runs into trouble, it won’t jeopardize the other assets. Without putting your assets in separate LLCs, all your eggs are in one basket and if something happens to that one basket you could be totally wiped out. For that reason some people choose to have separate LLCs for their larger assets such as a home, rental property, boat, or RV, to separate out any liability.

Because of the LLC and LP formation laws in certain jurisdictions, you can form limited liability companies (LLCs) and family limited partnerships (FLPs) that can provide total asset protection. There are only a few of states in the U.S. and a few places around the world where a LLC/FLP can be formed, while you own and control your entity and the assets within, they are completely off limit to your enemies. This meets our second criteria mentioned.

Let’s talk about the jurisdictions that allow you to form LLC/FLP with total asset protection. One of these jurisdictions is Nevada. Nevada was really just a desert with very few residents until the mobs came in and started the casinos. The mobs did not want anyone to get to the assets of their casinos and they made sure the law allowed total asset protection. The mobs had since gone and Wall Street had taken over. Nevertheless, the corporate law has not changed. If you know how to structure it, you can still form LLC’s/FLP’s in Nevada (and in Wyoming) and keep your assets safe from hungrey lawyers.

Another jurisdiction is the Cook Islands. An offshore trust formed in the Cook Islands can provide maximum asset protection if you structure it properly. You can use the Nevada or Wyoming LLC to protect fixed assets such as homes, boats, planes, and some liquid assets. You can use the Cook Islands Trust for large amount of liquid assets such as cash, stocks, and bonds. For most people, a Wyoming or Nevada LLC will be sufficient for their asset protection, however, for maximum asset protection, a higher net worth individual is going to want to utilize both types of entities.

You may be asking why Nevada and Wyoming are so unique. Well the answer to that comes back to our criteria of LLC laws. You see both these jurisdictions offer their LLCs and FLPs two unique features when setting up their LLCs: private ownership information and charging order protection. Nevada and Wyoming do not ask their corporate citizens for their ownership information. Therefore your ownership interest in a LLC or FLP in one of these jurisdiction is not a matter of public information. An asset search will not uncover your tie to such an entity.

The other feature is that the charging order is the sole remedy by statute for a judgment creditor making seizure of the assets within the LLC/FLP almost impossible.

Now the entities you form in Nevada, Wyoming or the Cook Islands cannot and should never be used to evade federal income tax since all U.S. residents and citizens must pay federal income tax on their worldwide income. There is no state income tax in Wyoming or Nevada and there is no income tax for trusts formed in the Cook Islands.

Other states allow lawsuits to pierce the corporate veil and enforce personal liability for the debts and actions of the corporation on its owners and officers but Wyoming and Nevada have the strongest corporate veils anywhere. Wyoming and Nevada laws clearly make the actions of a corporation’s representatives exempt from personal responsibility except in cases of outright fraud and even then they have to prove intent to defraud which is very difficult to do.

HERE’S AN EXAMPLE ON IMPLEMENTING ASSET PROTECTION

So now you have some understanding as to how these LLCs and FLPs limit your liability and provide you with the privacy and anonymity you need for maximum asset protection. Let’s now talk about how asset protection can work for you.

Let’s look at an example here. Let’s assume you sell a product and someone wants to sue you. A customer was slightly injured by a product that he bought from you so he goes down to the local personal injury attorney and tells him the story. The lawyer says great! We’ll sue him. Let me do some research and we’ll talk tomorrow

The lawyer then orders a preliminary asset search on you. When this report comes back, on the top of the page is your name, underneath that is your date of birth, your home address, your phone numbers, listed and unlisted, any children you have and their names and ages. Below this is the Nationwide Asset Sweep listing all property you own, any vehicles, brokerage accounts, bank accounts and tax information.

When this disgruntled customer returns to the attorney the next day the attorney is going to say one of two things:

“Great, all the assets are right here. He has deep pocket. Let’s draft a complaint and sue this guy” or

“I can sue this guy but there are no visible or attachable assets to go after…I can start proceedings if you want but I’ll need a $15,000 retainer to cover my initial attorney’s fees and expenses.”

Based on human nature, 99% of all litigation will stop right here. Contingency fee lawyers need a pot of gold at the end of the rainbow. They’re not interested unless there is the potential for a big reward

So you want to be in the second category where you are not at risk.

So to start off, let’s assume you have a home worth $500,000 and you have $250,000 in stocks and bonds in your brokerage account. On your home you have a first mortgage for $300,000. You have $200,000 in equity in the home and $250,000 liquid assets exposed. So what do you do?

First you would form a Wyoming or Nevada LLC formed specifically for asset protection.

Do you transfer title of the home into the LLC then? No, for a few reasons: One is you want the home to stay in your name. It becomes the decoy. You see, the first things a competent injury attorney will ask are:

Does he own a home?

Does he have a job or own a business?

If you are living a six-figure lifestyle and you don’t own a home he’s going to assume your assets are hidden and may want to go looking for them. However, if you own your home and it’s mortgaged to the hilt, well, that’s not so unusual. That’s pretty common these days. The other reasons you want to retain title to your home is for tax deductions on mortgage interest, capital gain tax exemption when you sell your home and the protection you already get from homestead exemption in your home state.

So if you don’t transfer title, what do you do? You can equity strip by placing a mortgage lien on the home for $220,000 and record it in favor of your LLC. You may be asking, “What is equity stripping?” Equity stripping is a legal lien placed on a real property and it represents the equity you put into the LLC in the form of a promissory note. The LLC provides you with owner’s equity from the debt owed to the LLC, and in return it places a mortgage lien on your home as collateral for the promissory note. At any rate, it serves your purpose of encumbering any remaining equity in your home.

Now, you can then transfer the $250,000 in your stock and bond portfolio to a Cook Island Trust brokerage account under your management. You still retain control over all the assets yet any equity is now invisible to the predatory eyes of an attorney.

If you don’t have enough cash, stocks and bonds to want to go overseas, you can open a bank account and/or an online brokerage account under the LLC.

For your vehicles, if you owned them outright you would add the Asset Protection LLC as a lien holder on titles with the department of motor vehicles.

So between the Asset Protection LLC and the offshore trust you have effectively eliminated your exposure to liability and your assets would no longer show up on one of these asset searches, keeping you safe from lawyers.

As powerful as these strategies are in protecting your assets from lame lawsuits, they must be put in place long before any legal challenges surface. Any asset transfers you make after a legal challenge will be considered fraudulent conveyance and will be set aside by the courts. Therefore, if you feel you are a potential target for lawsuits because of your profession, the nature of your business or your investment property holdings, the time to act is now.

DISCLAIMER: All information contained in this website is for education purpose only. Asset Protection Consulting Group, Inc., their agents and affiliates cannot and will not render any legal or tax advice of any kind, unless said agent is duly licensed by the applicable state and/or federal authority to give said advice.